The Hindu : Business : Direct tax proposals in Finance (No.2) Bill, 2004

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Monday, Jul 12, 2004

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Direct tax proposals in Finance (No.2) Bill, 2004

QUESTION: What are the proposals which affect or benefit the salaried person?

ANSWER: Salaried employees with total income not exceeding Rs. 1 lakh, will get a tax rebate under Sec. 88D of an amount equal to tax. It is an interesting and innovative exercise, so as to avoid this benefit to those with income above Rs. 1 lakh, which they would have otherwise got, if the minimum limit had been enhanced to Rs. 1 lakh. Slab and tax rates otherwise remain the same.

Another provision made exclusively for the salary sector is the amendment to Sec. 71, which bars set off of any loss under the head business or profession against income from salary. Probably the inference is that such claims are usually not genuine.

Those in either part-time employment or business would therefore find that this denial of set off would fasten liability, even when their real income is less. There is a similar denial of loss under the head capital gains and some losses in share transaction deemed to be speculation loss, so that there is further distancing of statutory income from real income, but this time it is the salaried employees who are affected.

A new Sec. 80CCB provides that in respect of a Central Government employee, who joins service on or after January 1, 2004, his contributions will be deductible to the extent of 10 per cent of his pay and any contribution by the Government will be fully exempt. Annual accretion to such pension fund will also not be taxable, but such amount allowed as a deduction along with other accruals will be taxable on closure of the account or on the employee opting out of the pension scheme or when the amount is received as pension either by him or by his nominees. No rebate on contributions would be admissible as, hitherto, available.

In respect of other matters, whether for benefit or liability, salaried employees are on a par with others. Salaried employees will pay 2 per cent educational cess along with others.

Q: What are the main changes in respect of taxation of individuals and HUFs?

A: There is the benefit of higher exemption limit of Rs. 1 lakh for individuals and Hindu Undivided Families and the education cess at 2 per cent for those who are not exempt.

An amendment to Sec. 2(24), extending the definition of income by insertion of clause (xiii), provides for deeming any receipt in cash or cheque or draft or any other mode or as a credit in his favour as income, unless such amount is consideration for sale of goods or for services. Of course, if it is for sales of goods or for service, there is liability for tax even otherwise. This is subject to certain exemptions such as gifts from specified relatives or amounts received by way of inheritance or amounts received as pension or gratuity or insurance amounts or as a compensation received as a dependent of a deceased employee for services rendered by the deceased, or as a gift in contemplation of death of an individual or Karta by any other member of a Hindu joint family or any income which is exempt under Sec. 10 or any capital transaction which is otherwise exempt under Sec. 47. Sec. 10(39) exempts amounts otherwise taxable under Sec. 2(24)(xiii), if such amount in aggregate does not exceed a sum of Rs. 25,000 or any amount received by an individual on the occasion of marriage does not exceed Rs. 1 lakh, so that even gifts received from non-relatives up to Rs. 25,000 ordinarily and Rs. 1 lakh at the time of marriage would not be treated as income. This section is a substitute for gift-tax, which has been abolished because of the experience of the Income-tax Department that unaccounted income surfaces as gifts from strangers. While such an anti-avoidance provision would be necessary to arm the Revenue, the manner in which it has been worded would expose individuals and HUFs to liability on items which have not been contemplated by the exemption as in cases of disputed credits in assessee's favour in third party accounts.

The section is most clumsily worded and one of the many exceptions is gift in contemplation of death, which is a tentative gift made by a person who is ill and makes the gift in anticipation of death, such gift reverting to owner, if he recovers from such illness. Such gift known in English law as gift mortis causa is not known in Indian traditions.

The exceptions are mostly such items or which are otherwise specifically exempt or specifically taxable. A general provision making an assessee responsible to prove what he has received is not taxable income is one which is found in statutes of many other countries. But such a general provision is probably preferable to the one now proposed and confined only to individuals and HUFs. There are exemptions under Sec. 10(18) for family pension for war widows and other family members of the deceased, who have died in action subject to conditions to be prescribed.

The concession under Sec. 80DD for those supporting disabled persons and the disabled persons themselves under Sec. 80U would now stand extended to more illness, namely, autism, cerebral palsy and multiple disabilities falling under Sec. 2 of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

The means by which such disability could be proved is an ordeal for this class of persons. It is necessary that appropriate rules, which are awaited by the disabled even for assessment year 2004-05 should take into consideration this aspect of the matter.

S. Rajaratnam

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